"They're on to us," Jeff Skilling told an inner circle of top Enron executives at a mid-2001 meeting, a witness recounted in testimony Thursday.

The comment came just after a Wall Street analysis questioned the quality of the company's earnings, the value of its much-touted Internet business and whether it wasn't just a high-risk trading company, according to the testimony.

Kevin Hannon, 45, the former chief operating officer of Enron Broadband Services, was on the stand for only a few hours Thursday, but that was enough to paint a potentially devastating picture of a May 21, 2001, meeting.

He said Skilling, Ken Lay and others discussed how the analysis that valued Enron stock at $27 a share — about half what it was selling for at the time — showed "the market was starting to understand how Enron was making money."

It was a monthly policy committee meeting at the Doubletree Hotel downtown, Hannon said, where Greg Whalley, a wholesale trading division executive, said of the analysis by a group called Off Wall Street that "other than criticizing us for being a trading company, it's pretty much on target."

This revelation could hurt Lay and Skilling because they were both in the room when Hannon said they had this cavalier discussion of Enron's weaknesses. But both men went on to paint rosy pictures to investors and employees during the next few months.

'Stunned silence'

Hannon said the analysis in question stressed Enron's problems with side deals with third-party entities. He said Skilling brought then-Chief Financial Officer Andrew Fastow to the meeting to address that issue. Hannon recalls Fastow was asked about his LJM side companies, named for Fastow's wife and children and used to help Enron hide its troubled assets.

"He said LJM is a good deal for me," Hannon testified. "It was met by stunned silence."

Hannon told questioning prosecutor Cliff Stricklin that those in attendance — Skilling, Lay, Fastow, Whalley and chief accountant Richard Causey — were very concerned about the report because the stock was "trading in the $50s and $60s, and we'd lose a lot of money" if this report was widely believed.

Hannon is the sixth former Enron executive who has pleaded guilty to a crime to come before the panel of 12 jurors and four alternates in U.S. District Judge Sim Lake's court. Originally indicted on charges of conspiracy, money laundering and insider trading, Hannon pleaded guilty in 2004 to one count of conspiracy to commit securities and wire fraud.

Troubled Internet division

Stricklin also questioned Hannon about a March 2001 meeting in which he chronicled the financial woes of his Enron Broadband Services division for Skilling.

Hannon said Skilling suggested: "Why don't we just roll it up into wholesale?" Hannon said he took that to mean Skilling was suggesting burying the troubled Internet business in the profitable wholesale trading division so the failure would go unnoticed. This could be important to the case because Skilling and Lay are arguing that retail division losses shifted to the wholesale trading division about this same time in 2001 were put there to create efficiencies, not to hide losses.

Hannon also said Skilling made six false statements to analysts later in March 2001, sometimes stating the opposite of what Hannon had previously told his boss about EBS.

Hannon said Skilling falsely told analysts that EBS had a great quarter, that it was good news employees would be redeployed, that EBS was coming along fine and that there was strong growth in the two sections that were supposed to be producing revenue.

'I relied on Ken Lay'

Before Hannon took the stand, the jury heard from a former Enron employee who lost his retirement savings when the company collapsed.

John Sides, 52, a 22-year veteran of Enron, said he trusted Lay's promises enough to make investments based on them. On questioning from prosecutor Robb Adkins, Sides told the jury "I relied on Ken Lay."

Sides said he has since thrown out all his retirement documents "because they were too depressing."

The jury never heard how much Sides lost because Lay's lawyers requested that details about employees' losses be banned from the trial because they are too prejudicial. Lake ruled these details could not be presented in evidence.

But it has been reported that Sides, of Houston, saw his 401(k) worth about $500,000 dwindle to $4,000 when the company collapsed.

Sides agreed on cross-examination by Lay lawyer George McCall 'Mac' Secrest that he could have made more cautious investments that leaned less on Enron stock. Instead, Sides bought Enron stock even into late 2001 when the price was plummeting but Lay was telling employees it would rise again.

Hannon will return Monday, the beginning of the trial's sixth week. Next, likely Tuesday, will be Fastow, the ex-chief financial officer who once faced 98 charges but since has pleaded guilty to two charges and is cooperating with the government.